Journal European Court of Auditors

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1 DECEMBER 2014 NO. 11 EUROPEAN COURT OF AUDITORS Journal European Court of Auditors

2 Past editions of the Journal can be found on: ECA s website: EU bookshop: PRODUCTION Rédacteur en chef / Editor in Chief : Rosmarie Carotti Tél. / tel.: Mise en page, diffusion / Layout, distribution : Direction de la Présidence - Directorate of the Presidency Photos : Reproduction interdite / Reproduction prohibited ECA The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors

3 TABLE OF CONTENTS 1 ANNUAL REPORT ECA s Annual Report 2013 Extracts from the speech of ECA President Vítor Caldeira 05 Le rapport annuel 2013 présenté au Luxembourg Par Rosmarie Carotti 07 Presentation of the Annual Report to the Portuguese authorities By Paula Betencourt, private office of the President 08 Presentation of ECA annual and other reports in The Hague By Gaston Moonen, head of private office European economic governance: from fiscal self-discipline to strengthening of supervision By Nikolaos Milionis, ECA Member The democratic control of public-private partnerships By Professor Christopher H. Bovis, Professor of International and European Business Law, University of Hull TEN YEARS OF ENLARGEMENT Latvia encourages further co-operation By Elita Krūmiņa, Auditor General, State Audit Office of the Republic of Latvia 21 NAO (Malta) experience of ten years of EU largement Brian Vella and Maria Attard (Performance Audit Section) - National Audit Office of Malta 27 The EU 2004 enlargement and the Court of Audit of the Republic of Slovenia By Dr Tina Eržen, Advisor for Legal and International Affairs ECA and Polish SAI signed an agreement on cooperation By Katarzyna Radecka, private office attaché 30 FOCUS Special report 16/2014 The effectiveness of blending regional investment facility grants with financial institution loans to support external policies Interview with Sabine Hiernaux, head of unit and Werner Vlasselaer, team leader in Chamber III By Rosmarie Carotti 34 The psychology of financial bubbles and their role in financial crises By Rosmarie Carotti

4 ECA s Annual Report 2013 Extracts from the speech of ECA President Vítor Caldeira 2 The ECA published on 5 November 2014 its Annual Reports on the implementation of the EU budget and on the European Development Funds for the 2013 financial year. President Vítor Caldeira presented the reports to the European Parliament's Committee on Budgetary Control (CONT) on the same day. President Caldeira and Lazaros S. Lazarou, the Member responsible for the Statement of Assurance, then presented the ECA's key messages at a press briefing. and public bodies, across Europe and around the world. In the ECA report on 2013, these transactions were properly recorded and accounted for in line with international standards for accrual based accounting. As, indeed, has been the case since the start of the programming period in Lazaros S. Lazarou, ECA Member responsible for the statement of assurance, Vítor Caldeira, ECA President EU financial management New spending programmes and financial rules have been fixed for the 2014 to 2020 period which must now be properly implemented and applied. At the start of this new spending period, the ECA report says EU financial management was not yet good enough overall. The EU spends its budget but there is still significant room for further improving how those funds are spent. EU spending As regards spending EU financial resources, payments from the EU budget in 2013 reached almost 99% of the maximum available for the year. In total, the EU spent over 148 billion. That is more than 18 out of the 28 governments of the Member States spend each year. And it represents around 290 for every EU citizen. Spending the 2013 EU budget involved making payments to millions of individuals and organisations, including farmers, small businesses In other words, the ECA has signed off a clean audit opinion on the reliability of 2013 EU accounts prepared by the Commission. Managing EU cash-flows in the coming years A few words of caution are needed on two issues related to managing EU cash-flows in the coming years. First, despite the high level of payments, the accounts show that outstanding financial commitments and other liabilities continued to grow in At the year end, they stood at 322 billion and the figure is likely to rise as the 2014 budget provides for more commitments to be made than payments. These overhanging financial obligations are a matter of particular concern because, for the first time, payment ceilings are set to remain broadly stable in real terms for a number of years. In this context, it is important to anticipate potential funding shortages for EU programmes. That is why the Court has again recommended, among other things, that the Commission should prepare a long range cash-flow forecast. Financial engineering instruments Second, a significant amount of EU money has already been placed in financial engineering

5 3 instruments and the Commission plans to make even greater use of them in future. The EU funds placed in these instruments are subsequently used to provide support for investments in projects by way of loans, guarantees, or equity. However, according to the latest Commission figures, only 37 % of the 8.4 billion that had been paid in to financial engineering instruments from 2007 to the end of 2012 had actually been paid out to final beneficiaries. Furthermore, these instruments are complex and difficult to account for correctly, which also makes public scrutiny more challenging. Therefore, the Court recommends that the Commission take care to ensure that contributions from the EU budget to such instruments reflect real cash-flow needs and are properly accounted for. Compliance with the rules The EU budget gets spent. But once again it is clear from the ECA s audit just how much of that spending is not in compliance with the rules. As is required by the Treaty, the ECA carries out its annual audit to provide a statement of assurance on the reliability of the EU accounts that also covers the regularity of the transactions underlying those accounts. As in all previous years of the programming period, the ECA concludes that, taken as a whole: Revenue in 2013 is regular. Financial commitments made in 2013 are also regular. But payments are materially affected by error. The ECA arrived at these conclusions mainly by testing representative samples of transactions for revenue and expenditure. This approach enabled it to provide reliable estimates of the error rates for payments as a whole, and for the different spending areas in the budget. Error estimates for payment errors In 2013, the ECA estimates that the overall error rate for payments is 4.7% compared to 4.8% in And the estimated error rate has been above what is called the materiality threshold of 2% for all the years that the ECA has been auditing the EU accounts. In 2013, almost all areas of expenditure were affected by a material level of error. The only exception was the 10.6 billion euro the EU spent on its own administration. The results also show that errors occur not only in all areas of operational expenditure, but also in all places where EU funds are spent. Getting results from EU spending During the programming period, the managers of EU funds focused primarily on spending the money available, secondly on complying with the rules, and only then and to a comparatively limited extent did they focus on achieving results and impact. This needs to change if performance is to improve significantly. In this context, the Court welcomes Commission initiatives to foster a culture of performance. That culture needs to be based on a genuine commitment, at EU and national level, to getting the best results possible with limited EU financial resources. It is also essential that the right incentives are in place to encourage performance. In the report, the ECA acknowledges the role that the performance reserve may play in this respect. But the ECA also warns that if it is to provide an effective financial incentive to Member States, then suitable targets for results need to be agreed up front and reliable information has to be available on progress towards achieving them. Need for better information on performance The ECA also emphasises that better information on results achieved is a pre-requisite for ensuring more effective accountability for performance at EU level.

6 ECA s Annual Report 2013 continued 4 In recent years, there have been significant developments in the framework for reporting performance at EU level, notably the introduction of the annual evaluation report produced by the Commission. However, in the ECA s view, the framework needs to be further improved. In particular, because it is too fragmented and does not sufficiently cover important elements, such as EU added value and progress towards the Europe 2020 strategy goals. Therefore, the ECA makes three specific recommendations to the Commission: First, propose a more coherent performance reporting framework next time the financial regulation is reviewed; Second, summarise progress towards the Europe 2020 targets in the annual evaluation report; and Third, further develop the arrangements within the Commission for taking responsibility for the contribution EU spending makes to policy achievements. Key messages Summary of the 2013 statement of assurance The European Court of Auditors (ECA) gives a clean opinion on the reliability of the 2013 accounts of the European Union. Revenue for 2013, taken as a whole, is legal and regular. Commitments for 2013, taken as a whole, are legal and regular. Payments for 2013 are materially affected by error. The ECA therefore gives an adverse opinion on their legality and regularity. For the statement of assurance, please refer to Chapter 1 of the 2013 annual report. The estimated error rate, which measures the level of irregularity, for 2013 payments is 4.7 %, close to that of 2012 (4.8 %) and persistently above the materiality threshold of 2 %. Overall, with significant variations between Member States, the supervisory and control systems examined were partially effective in ensuring the regularity of payments. The two most error prone spending areas were regional policy, energy and transport with 6.9 % and rural devel opment, environment, fisheries and health with 6.7 %. For shared management as a whole, i.e. including also agriculture: market and direct support and employment and social affairs, the estimated error rate was 5.2 %. Corrective and recovery action by authorities in the Member States and the Commission had a positive im pact on the estimated error rate. Without this action, the overall estimated error rate would have been 6.3 %. Vítor Caldeira, ECA President and Lazaros S. Lazarou, ECA Member responsible for the statement of assurance, In conclusion, it is not a matter of choosing between spending the money, complying with the rules, and getting results. It is about managing to do all three at once. The ECA is fully committed to using its audit work to assist the EU institutions and Member States to make best use of EU funds to achieve the results that EU citizens rightly expect to see. As in 2012, for a large proportion of the transactions affected by error in the shared management areas, authorities in the Member States had sufficient information available to have detected and corrected the errors before claiming reimbursement from the Commission. A continued rise in sums to be funded from future budgets, despite a significant increase in the 2013 pay ments budget, makes it essential for the Commission to plan its payment requirements for the medium and long term. Spending of EU funds in the programming period was focused on absorption ( use it or lose it ) and compliance rather than good performance. This lack of focus on performance is a fundamental flaw in the design of much of the EU budget.

9 Presentation of the Annual Report to the Portuguese authorities 7 By Paula Betencourt, private office of the President The presentation of the annual report essentially followed on from the previous day s presentation to the European Parliament s Budgetary Control Committee, and emphasised those aspects of the annual report that were relevant for Portugal. From left to right: Dr António Santos Carvalho, Judge, Portuguese Court of Auditors Prof. Guilherme d Oliveira Martins, President, Portuguese Court of Auditors, Vítor Caldeira, ECA President On 6 November 2014 at Portugal s Tribunal de Contas in Lisbon, Vítor Caldeira, the President of the European Court of Auditors (ECA), presented the 2013 annual report to the national authorities responsible for managing and scrutinising EU funds. The event was attended by the vice-chairman of the Portuguese parliament s Budget, Finance and Public Administration Committee, representatives from various government ministries (e.g. Defence, Justice and Health), the Ministry of Finance s Directorate- General for the Budget, the Development and Cohesion Agency, fund payment managers and bodies, the Inspectorate-General of Finance, and the sectoral inspectorates of various ministries. The presentation was broadcast as a videoconference to the Tribunal de Contas regional sections for Madeira and the Azores. After the presentation, Mr Caldeira answered questions from journalists and met with the Deputy Minister for Regional Development, who is responsible in Portugal for the National Partnership Agreement. Mr Caldeira took advantage of the occasion to stress the need for improvements in providing information about the national accounts and in the accounting procedure, and for the report to place greater emphasis on the results obtained, whether at EU or national level. In this regard, he felt that increased cooperation between the ECA and the Member States SAIs was essential, in particular when assessing the impact of the Europe 2020 strategy. In conclusion, Mr Caldeira stressed that the choice was not between spending money, obeying rules and obtaining results; the primary aim was to manage all three aspects at the same time. Only in this way could accounting procedures protect the public s financial interests, promote a climate of trust and ensure that EU funds were put to the best possible use.

10 Presentation of ECA annual and other reports in The Hague By Gaston Moonen, head of private office 8 - Both on 5 and 6 November Mr Brenninkmeijer gave several interviews broadcasted on Dutch national television and radio and published in many national newspapers. Mr Alex Brenninkmeijer handing over the ECA 2013 Annual Report to Mr Mark Harbers, Member of the Dutch Parliament and chairman of the Public Accounts Committee For the Dutch Member of the ECA, Alex Brenninkmeijer, it was the first time he presented an ECA annual report. Together with his private office staff, he undertook a range of activities on 5 and 6 November 2014 to give a high exposure to the main messages of the 2013 Annual Report but also of recent other ECA publications: - To obtain the reactions of the European Parliament he attended the discussion of the 2013 Annual Report in the Budgetary Control Committee; In his presentations Mr Brenninkmeijer underlined that for this 20 th negative Statement of Assurance the Discharge Authorities and the Member States should give follow-up with concrete measures to improve EU financial management. Otherwise the ECA should focus more on performance auditing. Performance should also exactly be the focus of the new Commission when improving its management. Mr Brenninkmeijer highlighted the current focus on input and absorption, particularly in Member States, while the issue that really matters to Dutch and European citizens is what the impact of EU programmes and policies have been. Mr Brenninkmeijer also highlighted the need for Europe, including the ECA, to include in plain language (as the ECA did in its summary EU audit in brief ) so that it is understandable to the citizens what the EU is doing, why it is doing it and what it has led to. - Right after the press conference of the President and Mr Lazarou on 5 November, he gave a briefing to the correspondents for the Dutch media in Brussels; - He spoke with the Dutch Minister of Finance to provide the main ECA messages and his main concerns concerning EU financial management issues; - Hosted by the Dutch SAI Mr Brenninkmeijer gave a presentation, followed by a discussion, to EU policy specialists and staff responsible for financial management issues of several Dutch ministries and the Dutch SAI; - On 6 November he presented the main findings of the ECA to a combined meeting of the parliamentary committees of the Dutch Public Accounts Committee and the European Affairs Committee;

11 European economic governance: from fiscal self-discipline to strengthening of supervision * By Nikolaos Milionis, ECA Member 9 of their national stability and convergence programmes. Moreover, they bound themselves to embark without delay on the action they deemed necessary to make corrective fiscal adjustments as soon as they were informed of any risk of excessive deficit, as well as to rectify any such situation that arose as promptly as possible. Nikolaos Milionis, ECA Member European economic governance: om fiscal self-discipline to strengthening of supervision 1 1. The light-handed coordination of European economic governance Fiscal discipline, in the sense of self-regulation or self-discipline, on the part of European Union (EU) Member States (MSs) was first enacted in the Treaty of Maastricht (1993), and further strengthened by the Amsterdam European Council (1997) when it defined a regulatory framework for coordination of the national fiscal and economic policies of MSs participating in Economic and Monetary Union (EMU). This framework took the form of a Stability and Growth Pact (SGP) in 1997 that included the conditions relating to fiscal discipline that were to be met by MSs following the introduction of the single currency. The Pact comprised three individual texts: firstly, the Resolution of the European Council of 17 June 1997 on the SGP, secondly, Council Regulation (EC) No 1466/1997 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies and, thirdly, Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure. Under the above-mentioned Resolution of the European Council, the MSs undertook to meet the medium-term objective of budgetary positions close to balance or in surplus. They also committed themselves to taking the corrective fiscal action they deemed necessary to attain the objectives * This text was read at the conference held in honour of Professor Vassileos Skouris, President of the Court of Justice of the European Union, on 28 and 29 March 2014 in Thessaloniki Under the SPG, it was for the Council to examine whether the medium-term budget objective in the stability/convergence programmes provided for a safety margin to ensure the avoidance of an excessive deficit, to monitor the implementation of stability/convergence programmes, and to recommend that the Member States concerned would take the necessary adjustment measures. Also, concerning the excessive deficit procedure it was for the Council to decide by qualified majority if an excessive deficit existed and to specify the sanction to be imposed. In other words, the SGP provided the model for light-handed coordination of European economic governance. 2. Exposure of the weaknesses of lighthanded coordination Given its optimistic economic climate, the first decade of the functioning of EMU did not alter the institutional framework being set up, one that was also recognised under the Treaty of Lisbon (2009). However, the financial and economic crises experienced in recent years by many euro-area Member States have demonstrated that the model of European governance operating up to that time was incapable of either preventing or mitigating those crises. The light-handed coordination model evidenced fundamental shortcomings and revealed that its capacity to formulate and apply European rules and recommendations had been exhausted, mainly because it had operated on the premise that there had been sufficient incentive for the countries to keep their economic house in order. Unfortunately most of the euro area Member States (and also many outside the eurozone) had been reported to present excessive deficits i.e. Council Decisions 2009/414/EC, 2009/415/EC, 2009/416/ EC, 2009/417/EC, 2009/587/EC, 2010/182/EU, 2010/282/ EU, 2010/283/EU, 2010/285/EU, 2010/286/EU, 2010/287/ EU, 2010/288/EU, 2010/289/EU, 2010/291/EU, 2010/320/EU, 2010/401/EU, 2010/407/EU

12 European economic governance: from fiscal self-discipline to strengthening of supervision continued 10 At the same time, this complex crisis led to realisation of the extent of the systemic linkage of countries in the euro area, as well as of the significant interaction between State, private and financial sectors. This interconnection at many levels also resulted in significant political and social impact on euro-area countries, thus highlighting the need for deeper integration of their fiscal, structural and financial policies. All of the above provided the momentum for reform of European economic governance with a view to dealing with immediate needs resulting from the crisis. 3. The European Semester: the beginning of enhanced supervision In the context of the current international economic and financial crisis and in order to deal with the exceptional needs arising from it, the European Council (25 and 26 March 2010) supported the need to align the timetable for submission and assessment of both the national Convergence and Stability Programmes that MSs were already required to submit under Regulation No 1466/1997, and the National Reform Programmes they submitted in connection with the Europe 2020 Strategy. One of the first initiatives to emerge from a task force on economic governance set up at the request of the March 2010 European Council and chaired by its president, Herman Van Rompuy, was the European Semester, which was to be the new tool for reform of the collective strategy for the coordination of MSs economic policies. It comprises a new form of architecture for economic and fiscal governance agreed by the EU MSs in Its purpose is to streamline economic and fiscal coordination at national and EU level and it has a strict annual timetable for the collection, analysis and evaluation of a broad range of economic and fiscal indicators. The above procedure takes place in the first half of every year and comprises examining the MSs fiscal and structural policies. The six-pack regulations codified the measures decided on under the European Semester. 4. The six-pack : systematic introduction of measures for enhanced supervision The Commission also brought forward a package of legislative measures that have been the most instrumental in enhancing economic governance in the EU and the euro area since the EMU s inception. This package is a six-pack of measures constituting secondary EU legislation and, in principle, applies to all 28 MSs, but also contains some special rules that apply only to euro-area MSs. This six-measure package is made up of three regulations and one directive focusing on fiscal matters and extensively reforming the SGP, as well as the two new regulations focusing on effectively identifying and addressing emerging macroeconomic imbalances in the EU and euro area. As far as the euro-area MSs are concerned, the changes were intended to lend substance to the enforcement mechanism and limit discretion in the application of penalties. In other words, the SGP was transformed into a system that operates on the basis of better-defined rules and whose penalties are more likely to be applied to those countries that breach their undertakings/ commitments. To be more specific, the idea of financial selfdiscipline on the part of MSs was set aside and the enhanced-supervision procedure was introduced, in which the Commission plays the most incisive role with regard to MSs assessments by means of monitoring, making on-the-spot visits, making recommendations and issuing warnings. Commission supervision involves carrying out extensive evaluations of the MSs systems of economic governance and submitting relevant proposals. The European Parliament takes part in these supervisory and evaluation procedures in a timely manner, working closely with the national Parliaments. Penalties are imposed on MSs so as to render the system of fiscal surveillance more effective and persuasive. At the same time, in the event of misrepresentation, whether intentional or due to serious negligence, of public deficit and debt data (which are indicators used to coordinate EU economic policy), a fine is imposed on euro-area MSs. This system of administrative penalties has been set up to reinforce both the preventive arm of the SGP in the euro area, and its corrective arm: 1) with specific regard to the preventive arm of the SGP (i.e. multilateral surveillance as organised by Regulation No 1466/97), where the Council adopts a decision establishing that an MS has failed to take action in response to a Council recommendation (second subparagraph of Article 6(2) of Regulation No 1466/97), the Commission is required, within 20 days of adoption of the Council's decision, to recommend that the Council, by a further decision, require the Member State in question to lodge

13 11 with the Commission an interest-bearing deposit amounting to 0,2 % of its GDP figure for the preceding year; 2) as regards the corrective arm of the SGP, (i.e. the procedure for the avoidance of excessive deficit in MSs as regulated by Article 126 of the Treaty on the Functioning of the European Union (TFEU) and Regulation (EC) No 1467/97), if the Council decides that an excessive deficit exists in a Member State which has lodged an interest-bearing deposit, or the Commission identifies particularly serious noncompliance with the legal fiscal-policy obligations laid down in the SGP, the Commission is required, within 20 days of adoption of the Council's decision, to recommend that the Council, by a further decision, require the Member State concerned to lodge with the Commission a (this time) noninterest-bearing deposit amounting to 0,2 % of its GDP in the preceding year. More power is granted to the Commission: The decision requiring a lodgement shall be deemed to be adopted by the Council unless it decides by a qualified majority to reject the Commission s recommendation (the Council s decisions are taken by reversed qualified majority voting). 5. The excessive imbalance procedure The above legislative package recognised that the purpose of the preventive arm of the SGP was to ensure that EU MSs follow prudent fiscal policies in good times to build up the necessary buffer for bad times. It was therefore proposed that control of public finances should be based on the concept of prudent fiscal policy-making which should ensure convergence towards the medium-term goal, completed by a set of incremental financial penalties on MSs in the euro area. The excessive imbalance procedure was thus identified as a new component in the framework of the EU s economic surveillance. This framework includes regular assessment of the risks of imbalances occurring on the basis of a scoreboard of economic indicators. Using those data, the Commission can carry out an in-depth review of MSs that are running the above-mentioned risk. In the case of MSs with serious imbalances or ones that jeopardise the functioning of the EMU, the Council may adopt recommendations and initiate the excessive imbalance procedure. An MS that is subject to the excessive imbalance procedure must present a programme of corrective measures that is verified by the Council, which determines the time-limits within which the corrective measures must be taken. Repeated failure to take corrective action renders the euro-area MS concerned liable to penalties. 6. The multiannual nature of national fiscal planning Furthermore, Council Directive 2011/85/ΕU of 8 November 2011 on requirements for budgetary frameworks of the Member States, which comes under the six-pack framework, requires the national authorities to clarify the approach they intend to take in order to comply with the provisions of Protocol No 12 on the excessive deficit procedure that has been annexed to the Treaty on European Union (TEU) and the TFEU. The MSs have to ensure that their fiscal planning is based on realistic macroeconomic and fiscal forecasts by using the most up-to-date information. These MS forecasts are compared with the Commission s most up-todate forecasts and those of any other independent bodies. The Commission supports the MSs in the preparation of their fiscal forecasts. The MSs also establish a reliable and effective medium-term fiscal framework providing for the adoption of a fiscal planning horizon of at least three years so as to ensure that national fiscal planning follows a multiannual perspective. 7. The two-pack : extending enhanced supervision Firstly, the increased risk of spill-over effects of budgetary policies and, secondly, the clear need for even stronger control mechanisms for the euro area, resulted in the Commission adopting two more Regulations to enhance budgetary supervision therein. This reform package, termed the two-pack, which concerns the euro-area MSs alone (in contrast with the six-pack ), entails increased transparency with regard to their fiscal decisions, greater coordination in the euro area as of the 2014 budgetary cycle and identification of the specific needs of euro-area MSs that are under severe financial pressure. a) The first Regulation, No 472/2013, lays down more specific measures for enhancing the economic and budgetary supervision of euro-area MSs that are either experiencing or threatened with undesirable developments in relation to their financial stability or the sustainability of their public finances that could also have adverse spill-over effects on other euro-area MSs, and that ask for or

14 European economic governance: from fiscal self-discipline to strengthening of supervision continued 12 receive financial assistance from one or more MSs or third countries, the European Financial Stability Mechanism, the European Financial Stability Facility or another relevant international organisation, such as the International Monetary Fund. These measures place the MSs under enhanced surveillance that may oblige them to communicate to the European Central Bank (ECB) detailed information concerning developments in their financial systems, or to carry out stress tests under the ECB s supervision in order to check the resilience of their financial sector. In parallel, the MSs are required to take measures to reinforce both the efficiency and effectiveness of their revenue collection capacity and the fight against tax fraud and evasion. b) In order to ensure that draft budgetary programmes are monitored and assessed and that the excessive deficit of MSs in the euro area is corrected, the second Regulation, No 473/2013, provides for a common budgetary timeline for the above, so that they better synchronize the key steps in the preparation of their national budgets. 8. The Treaty on Stability, Coordination and Governance in the EMU and the Fiscal Compact : consolidation of enhanced supervision Most EU MSs also went on to conclude the Treaty on Stability, Coordination and Governance in the EMU (2 March 2012) aimed at strengthening the economic pillar of the EMU, thereby adopting a set of rules intended to foster budgetary discipline through a fiscal compact, to strengthen the coordination of their economic policies and to improve the governance of the euro area, thereby supporting the achievement of the European Union's objectives for sustainable growth, employment, competitiveness and social cohesion (Article 1). The Treaty, in accordance with its strict self-limitation (Article 2(2)(b)), does not encroach upon the competences of the Union to act in the area of the economic union. The Fiscal Compact, which is established as Title ΙΙΙ of the abovementioned Treaty, provides that the budgetary position of the general government of a contracting party must be balanced or in surplus (golden rule, Article 3(1)(a)), which means that the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised SGP, with a lower limit of a structural deficit of 0,5 % of the gross domestic product (GDP) at market prices (Article 3(1)(b)). This lower structural-deficit limit of 0,5 % may reach a maximum of 1 % of GDP at market prices only where, firstly, the ratio of general-government debt to GDP at market prices is significantly below the reference value of 60 % and, secondly, where risks in terms of long-term sustainability of public finances are low (Article 3(1)(d)). Only in exceptional circumstances may the contracting parties temporarily deviate from their mediumterm objective or the adjustment path towards it (Article 3(1)(c)). In the event of significant observed deviations from the medium-term objective or the adjustment path towards it, a correction mechanism is to be triggered automatically (Article 3(1)(1)). This Treaty provides (Article 3(2)) that within one year of its entry into force, the rule stating that the budgetary position of the general government must be balanced or in surplus (i.e. the balancedbudget rule) is to have been implemented under the national legal systems by means of binding, permanent and, preferably, constitutional provisions, and full compliance therewith is to be guaranteed through the national budgetary procedures. The contracting parties are required to set up the correction mechanism provided for by this Treaty at national level and on the basis of common principles to be proposed by the Commission. These common principles concern, firstly, the nature and extent of, and timetable for, the corrective action that must be taken, even where exceptional circumstances apply, and, secondly, the role and independence of the bodies responsible for the nationwide monitoring of compliance with the rules in question. This correction mechanism must fully respect the prerogatives of national Parliaments. Title V of the Treaty on Stability, Coordination and Governance in the EMU regulates governance of the euro area and states that the Heads of State or Government of the contracting parties whose currency is the euro are to meet informally in Euro Summit meetings, together with the President of the European Commission. The President of the European Central Bank is also invited to take part in the meetings. The summit meetings are held when necessary (and at least twice a year) to discuss questions relating to their specific responsibilities

15 13 with regard to the single currency and governance of the euro area, as well as the rules and strategic guidelines for increasing convergence in the euro area. 9. Judicial oversight of the imposition of enhanced supervision Pursuant to Article 273 of the TFEU, the Court of Justice of the European Union (CJEU) has jurisdiction in respect of compliance with the balanced-budget rule. To be specific, the Commission presents contracting parties with a report on the introduction of the balanced-budget rule into their respective legislative or constitutional systems. Where the Commission concludes in its report that the contracting party concerned has failed to comply with the relevant provisions of the Treaty, one or more contracting parties may, as indicated in the actual Treaty on Stability, Coordination and Governance in the EMU, refer the matter to the CJEU. Where, irrespective of the Commission s report, one contracting party deems that another such party has failed to comply with the Treaty rule concerned, it may refer the matter to the same Court. In both cases, the Court s judgment is binding on the parties to the proceedings which are to take the requisite measures to comply with the judgment by the deadline fixed by the Court. Furthermore, where a contracting party, on the basis of either its own or the Commission s estimates, believes that the Court s judgment has not been respected in that the requisite action to comply has not been taken, it may address the same Court and seek to have financial penalties imposed on the basis of criteria that are laid down by the Commission under Article 260 of the TFEU. Should the Court establish that the contracting party at issue has not complied with its judgment, then it may impose a lump sum or penalty payment appropriate to the circumstances that may not exceed 0,1 % of its GDP. The sums imposed on the contracting parties of the euro area are paid to the European Stability Mechanism, while in the remainder of cases the fines accrue to the general budget of the EU. The idea of enhanced coordination of economic policies, which underlies all the above-mentioned mechanisms, is not new. It held a pre-eminent position in the 1988 Delors report, while under * Regulation No 1466/1997 MSs were already required to submit stability and convergence programmes under the preventive arm of the SGP. However, compared to the practice prior to 2011, the difference lies primarily in the point in time at which they are submitted, because the national governments are required to furnish the stability and convergence programmes before they are debated in the national Parliaments and incorporated under national legislation. This coordination is founded on adherence to the guiding principles of stable prices, sound public finances and monetary conditions and a sustainable balance of payments. The European Legislator also establishes a framework (invoking mainly regulations, i.e. a legal instrument of higher ranking in terms of legal norms) that inevitably results in a significant proportion of national political initiative in the drafting of economic policies being confided to the EU, which has significant institutional, economic and social implications.

16 The democratic control of public-private partnerships By Professor Christopher H. Bovis, Professor of International and European Business Law, University of Hull 14 Professor Christopher H. Bovis, Professor of International and European Business Law, University of Hull at the EU Accountability Conference, 14 October 2014 in Brussels Introduction The notion of Public-Private Partnerships reveals forms of co-operation between the state and private actors which exceed the remit of traditional contractual interface, moving into a strategic sphere of public sector management. Public-Private Partnerships aim at delivering both infrastructure facilities and public services and are regarded as attractive and credible solutions to traditional methods of financing, organising and delivering public services in the EU. The axiom of partnerships in public service delivery The modern state justifies its existence through the provision of public services, a concept which encapsulates the pursuit of public interest. The delivery and regulation of public services are based on two diametrically different models which reflect on internalisation choices or externalisation choices on the part of the state. Firstly, as far as internalisation choices are concerned, the notion of public services often fuses with state ownership of assets or infrastructure and amalgamates the ensuing provision of services to the public. It also refers to functions which underpin essential facilities of the state (i.e. defence, justice, policing) and as a result these functions are sheltered from market forces in order to ensure the integrity of their delivery. Secondly, in relation to externalisation choices of the state, public services regularly capture interests of general needs which are delivered through market-based mechanisms where the public sector interfaces contractually or even competes with private actors. However, the externalised organisation and delivery public services reveals that their providers interface with the state in a market place which does not correspond to the principles and dynamics of private markets, thus requiring a different type of regulation which could be seen an amalgam of legal, financial and policy attributes reflecting the constant changing of societal needs, expectations and requirements. Optimal risk management is the prime advantage to the state which emerges from involving private actors through a partnership format in the delivery of public services. This axiom underlines the principle of public accountability for the modern state in a number of ways. The private actor partner often commits its own capital resources for the funding and the delivery of public services. It is not therefore a mere contractor; it is a stakeholder which has a vested interest in the effective and efficient delivery of the relevant public services in order to attain its returns and recoup its investment. This attribute results in an increased certainty of outcomes, both in terms of on-time delivery (the private actor is strongly motivated to complete the project as early as possible and to control its costs and so that the payment streams can commence) and in terms of within-budget delivery (the payment scheduled is fixed before construction commences, protecting the state from exposure to cost overruns). As a result, by transferring the risk of the funding required for the delivery of public services to private actors, the latter become an essential component of the state s functions, thus revealing a conceptual and strategic convergence between public and private sectors. Private actors in Public-Private Partnerships are often financially incentivised to offer value-for-money solutions in the delivery of public services through continuous quality improvement, innovation, management efficiency and effectiveness. As such, behavioural elements which traditionally underpin private sector entrepreneurship are harnessed by the state to enhance the quality of public services through a transfer of operational risk to private actors.

17 15 Public-Private Partnerships as public service instruments Public-Private Partnerships are public service instruments. As such, the state opts for an externalised model in the delivery of public services and heralds a departure from an asset-based to an enabled-based format in public services. Through risk transfer mechanisms, the publicprivate partnership is treated as an emanation of the state and reveals a different ethos in public sector management, that of the state as enabling and facilitating agent. However, the strategic role of private actors in financing and delivering infrastructure facilities and public services by providing input into the various phases such as finance, design, construction, operation and maintenance, reflect the need for longevity of the relations between public and private sectors. The often lengthy duration of Public-Private Partnerships is justified on the basis of affordability for repayment on the part of the public sector and on the basis of the ability of the private sector to recoup its investment profitably. Nevertheless, this could potentially result in market foreclosure. There is a pertinent need to address the competitiveness of Public-Private Partnerships before and after the procurement process of the private actor. Public-Private Partnerships are grounds where innovation as a concept and also as an instrument exists. Innovation as a concept runs through the raison d etre of Public-Private Partnerships. It epitomises the entire spectrum of such relations, as an alternative method of delivering public services. The source of the conceptual character of innovation in PPPs is partner motivation. The PPP relation is conducive to development processes and systems which create new ground and advance delivery and finance methods. The relationship between public and private sectors in PPPs is not adversarial. It is collaborative, joinedup and constructive. The contractual parties are partners in PPPs. This has a significant effect, both physiologically and practically. A party to a contract has esoteric motivation; a partner to a PPP has collective motivation. The way innovation functions as an instrument in Public-Private Partnerships is multiple. First, innovation underpins the value for money (VFM) principle in PPPs through a variety of features, such as payment mechanisms, risk pricing, cost authentication, service/product quality, performance management through key performance indicators (KPIs) and benchmarking. Secondly, innovation introduces the model of value engineering in PPPs, especially for the determination of specifications and standards and the development of solutions through R&D functions of the private partner. Thirdly, innovation is also propelled through incentivisation in PPPs, and in particular where the corporate relation between public and private sectors is encapsulating profit / revenue driven notions such as gain sharing, profit sharing and refinance opportunities. Finally, innovation depicts facets of effective governance in the relation between public and private sectors in PPPs which focus on contractual management, step in rights, asset treatment, taxation and dispute resolutions mechanisms. Public-Private Partnerships as investment instruments Public-Private Partnerships can be viewed as investment instruments. Financing for a Public- Private Partnership can take one of the following forms: first, a stand-alone project, where the funding raised is for only one specific project; secondly, public-private partnership financing can be provided via special purpose vehicles (SPVs) which raise debt and equity funding from the private markets, blend private finance with EU Funds and also introduce risk and equity capital from EU Financial Institutions. Accountancy treatment of the SPV s consolidated accounts is aligned with the party which controls the SPV. If the private sector partner controls the SPV, its debt is recorded off-balance sheet for public sector borrowing considerations. If an SPV is controlled by the public sector, debt should be consolidated with public sector. Thirdly, a public-private partnership can be financed by securitization of claims on future project revenues. Regulatory control of Public-Private Partnerships Structure Regulation The development of two distinctive legal structures/ models will assist the evolution and delivery of Public-Private Partnerships. Firstly, the contractual model, where the interface between the state and the private actors reflects on a relation which

18 The democratic control of public-private partnerships continued 16 is based solely on contractual links. Under this model and structure, it is unlikely that there would be any element of exclusive asset exploitation or end-user payments levied by the private actor. However, mechanisms of profit sharing, efficiency gain sharing as well as risk allocation between the public and private partners distinguish contractual Public-Private Partnerships from traditional public contracts for works or services. The contractual model of Public-Private Partnerships assumes that the private sector partner will provide the financing for completing the project and the public sector partner will pay back by way of service or unitary charges which reflect payments based on usage volumes or demand (i.e. payments in lieu of fees or tolls for public lighting, hospitals, schools, roads with shadow tolls). Secondly, the institutional model of public private partnerships involves the establishment of a separate legal entity held jointly by the public partner and the private partner. The joint entity has the task of ensuring the raising of finance and the delivery of a public service or an infrastructure project for the benefit of the public. The direct interface between the public partner and the private partner in a forum with a distinctive legal personality allows the public partner, through its presence in the body of shareholders and in the decision-making bodies of the joint entity, to retain a relatively high degree of control over the development and delivery of the project. The joint entity could also allow the public partner to develop its own experience of running and improving the relevant public services, while having recourse to the support of the private partner. An institutional Public-Private Partnership can be established either by creating an entity controlled by the public and private sector partners, or by the private sector taking control of an existing public undertaking or by the participation of a private partner in an existing publicly owned company which has obtained public contracts or concessions. Procurement regulation Considerable emphasis has been placed on observing the public sector management principles such as transparency and accountability, competitiveness and value for money during the procurement process of Public-Private Partnerships. When a transaction creating a mixed-capital entity is accompanied by the award of tasks through an act which can be designated as a public contract, or even a concession, it is important that there be compliance with the principles of transparency and accountability, as well as the principle of nondiscrimination. The selection of a private partner called on to undertake such tasks while functioning as part of a mixed entity can therefore not be based exclusively on the quality of its capital contribution or its experience, but should also take account of the characteristics of its offer in terms of the specific services to be provided. The conditions governing the creation of the entity must be clearly laid down when issuing the call for competition for the tasks which one wishes to entrust to the private partner. Also, these conditions must not be discriminatory nor constitute an unjustified barrier to the freedom to provide services and to freedom of establishment. Risk treatment and its regulation A significant regulatory trend which has emerged as a result of the strategic role of the private sector and its long-term engagement in delivering infrastructure and public services reflects on the legal treatment of risk distribution between the public and private sectors within Public-Private Partnerships and in particular, the allocation and pricing of construction or project risk, which is related to design problems, building cost overruns, and project delays; financial risk, which is related to variability in interest rates, exchange rates, and other factors affecting financing costs; performance risk, which is related to the availability of an asset and the continuity and quality of the relevant service provision; demand risk, which is related to the on-going need for the relevant public services; and residual value risk, which is related to the future market price of an asset. Risk transfer from the public sector to the private sector has a significant influence on whether a Public-Private Partnership is a more efficient and cost-effective alternative to public investment and publicly funded provision of services. The cost of capital needed to finance a Public- Private Partnership should depend on the characteristics of project related risks and not on the source of finance. However, the source of finance can influence project risk depending on the maturity and sophistication of the risk bearing markets. On the one hand, within advanced risk bearing markets, it is irrelevant whether project risk

19 17 is borne by the public sector or the private sector. On the other hand, when risk bearing markets are less developed, project risk depends on how widely that risk is spread. This outcome might contravene the assumption that private sector borrowing generally costs more than government borrowing. However, this mainly reflects differences in default risk. The public sector s power to tax reduces the likelihood that it will default on its debt, and the private sector is therefore prepared to lend to the public sector at close to the risk-free interest rate to finance risky projects. The crucial issue is whether Public-Private Partnerships result in efficiency gains that offset higher private sector borrowing costs. Risk transfer from the public sector to the private sector has a significant influence on whether a Public-Private Partnership is a more efficient and cost-effective alternative to public investment and publicly funded provision of services. The public sector and the private sector typically adopt different approaches to pricing market risk. The public sector tends to use the social time preference rate (STPR) or some other risk-free rate to discount future cash flows when appraising projects. The private sector will include a risk premium in the discount rate it applies to future project earnings, where under the widely used capital asset pricing model (CAPM), the expected rate of return on an asset is defined as the risk-free rate of return plus a risk premium, the latter being the product of the market risk premium and a coefficient which measures the variance between the returns on that asset and market returns. A number of criteria have been devised to assess the degree of risk treatment in Public-Private Partnerships and these criteria involve asset ownership as an essential feature. The extent of risk transfer between the parties and the quantum for such transfer can be assessed by reference to the nature of contractual relations in a Public- Private Partnership. A distinction is made between separable PPPs, where asset ownership and delivery of public service elements are different features, and non-separable PPPs, where asset ownership fuses with public service delivery. Conclusions The success of Public-Private Partnerships rests on the relative efficiency of the private sector. However, this efficiency must demonstrate itself in a dynamic mode, reflecting the need for competition in the provision of the relevant services through and the imperative of democratic accountability and control of Public-Private Partnerships. The evolution of the control interface in Public- Private Partnerships will focus on regulatory standardisation which will have recourse to both hard law and soft law. Hard law will utilise normative acts of public law character in order to impose safeguards for accountability, competition and procurement of Public-Private Partnerships. On the other hand, soft law, in the form of guidelines, will create the appropriate environment in the fields of corporate structures and behaviour of public and private sectors, probity and anti-corruption, innovation, risk management, risk assessment, financing, securitisation, debt treatment and dispute resolution of Public-Private Partnerships. Regulatory standardisation in Public-Private Partnerships will augment legal certainty and will emit best practice in accountability, transparency and consistency in public service delivery. For Public-Private Partnerships to operate in a global competitive environment, safeguard the principles of transparency, and accountability in public sector management, structure regulation is paramount. Where a private sector operator can sell public services to the public, but there is little scope for competition, the public sector must regulate the prices for the relevant public services. However, the challenge is to design well-functioning regulation which increases output towards the social optimum, stabilises prices in a sustainable manner, and limits monopoly profit while preserving the incentive for private sector to be more efficient and reduce costs. This challenge is translated in the legal interface of the EU Member States and pose some considerable questions in relation to the role and scope of private actors in delivering public services, the regulatory compatibility between norms of anti-trust and exclusivity of private actors in delivering public services, the financial, operational and strategic expectations of private actors, the compliance and enforcement process of delivering public services, and finally, the treatment of risk.

20 The democratic control of public-private partnerships continued 18 Regulatory trends for Public-Private Partnerships will reflect on the current regulatory deficit in the EU, and in particular, the conceptual limitations of anti-trust to intervene in and regulate such complex relations between public and private sectors. Such limitations have set a new paradigm which has established that public services and the modality of Public-Private Partnerships function in a sui generis market-place, where state intervention in the organisation, structure and delivery of public services reveals a type of regulation based on public law. As a result of the importance of Public-Private Partnerships to close the infrastructure deficit in the EU, a standardised regulation will present national and trans-national features in a way that jurisdictional and enforcement characteristics will emerge not only within national markets but also within regional trading blocs. The national/ trans-national regulation will pave the way towards international norms of coherent and standardised dimensions with a view to establishing not only standardisation of law and policy but uniformity of application and implementation of Public-Private Partnerships and an increased and enhanced legal certainty for both the State, private actors and the public as end users of public services. Accountability is the discipline of regulatory systems which will emerge out of the route of national towards international regulation of Public- Private Partnerships will reflect on competing models for the delivery of public services. The state will have absolute discretion in engaging with private actors through Public-Private Partnerships to deliver public services or advance models of Public-Public Partnerships, which include intermediary marketisation of public services through mutual societies, social enterprise, and in-house arrangements. The competitive dynamics from the interface between Public- Private Partnerships and Public-Public partnerships will present a valuable benchmark to the State for the ever-increasingly changing background, expectations, standards and needs for the delivery of public services.

21 2004 TEN YEARS OF ENLARGEMENT 2014 Latvia encourages further co-operation By Elita Krūmiņa, Auditor General, State Audit Office of the Republic of Latvia 19 Elita Krūmiņa, Auditor General, State Audit Office of the Republic of Latvia This year we celebrate the 10 th anniversary of the 2004 enlargement of the European Union. This step was a major milestone for further development of the new Member States. Consequently, this step was a major challenge for Supreme Audit Institutions (further in the text SAIs) of the new Member States. We entered so called catchup phase, where we had to catch our more experienced colleagues from the old Member States in a number of areas. In fact, this was not only our good will; this was also our commitment made during the accession negotiations with the European Union to become a modern, independent and respected institution, working in accordance with International Auditing Standards. One could think this is an easy task, just time and sufficient amount of resources are needed. Those, having gone through this process, will certainly argue this was and still is a highly challenging task. Since it involves a change of philosophy. philosophy of both an institution itself and its employees, each and every auditor. We are proud to say that we have done our homework. We have managed to transform our thinking and operational practices from inspection type inflicting institution to a consulting body, providing added-value recommendations. We are well advanced in applying International Auditing Standards in financial and compliance audits and we work hard to constantly improve the performance auditing techniques. We build our office as a competence center, to be able to assist and share know-how not only with third countries, as we do now, but also with our old Member State colleagues and former teachers. However, during the transformation process we have also faced a number of un-expected issues. We were well aware that the transformation process itself would be a challenge. However, we never believed that the outcome of the process would be a challenge as well. One of those challenges is a slight feeling of isolation. How can this be explained? This is a feeling of having run ahead of the train and then - waiting for a long time for the train to come. The train being our public service and our society. Sometimes it seems that both the public service and the society would still prefer the inspection type SAI entitled to impose fines on the auditee. Public officials, if not financially or otherwise penalized, sometimes tend to be unconcerned. The current legal framework establishes accountability for incompliant (illegal) use of public resources, while fails to properly address inefficient and ineffective use of public resources. This has somehow led to perception by some of officials that efficiency and effectiveness are not relevant. Europe is struggling with the economic slowdown and the effects of the austerity measures it has chosen. Thus it becomes even clearer for everyone that the only means for the countries to allocate more funding for their policies are to be found in more efficient state governance. Thereby it is more important than ever to monitor the effectiveness and efficiency of the use of public funds with the help of performance audits which for obvious reasons should take an ever greater role. Having in mind the above, a logical question arises what should be the approaches and tools for the SAI to discuss the results and recommendations of performance audits with officials not being aware of what the terms efficiency and effectiveness mean? If we remember that performance audits ARE about efficiency and effectiveness. And when the society sees public officials being unconcerned in relation to SAI s findings and recommendations, they somehow feel nostalgia for inspection type and fighting SAI. This feeling is enhanced in countries where law enforcement

22 Latvia encourages further co-operation continued 20 authorities, like prosecutor s office, police, etc., are not sufficiently qualified to further process so called economic issues identified by SAIs in their audit reports. These are the main outcome challenges we have to face at the moment, however, and as 10 years ago, we are fully confident that the direction we have taken is the right one, and any challenges are just the issues of growth, which can be handled in a medium or long term. And SAIs are certainly ones of the main stakeholders in addressing the issues, even if they sometimes are beyond our mandates. Why we are and must be interested? Because this is the only way to maintain our role of the defender of society s interests. And here another dimension comes. In order to form a coalition with the society we have to better understand each other. In the current oversaturated flow of information it is difficult to attract public attention to the results of SAI s audit reports, as we had used to. SAIs should certainly pay more attention to development of professional communication strategies while not compromising their image of an independent institution. Finding the right solution for the communication gap is a first priority. Only a well-informed citizen would support the actions of a SAI. Without the support and trust of the citizens it is impossible to achieve the long-term goal of sufficient level of ethics in public service. To actively communicate we have to use all the tools offered by the modern technologies. Among others, we have to communicate more regularly through social media. In our country Twitter plays a great role since most of media and decision makers use this platform. Therefore we have started to actively communicate through this social media. Visual demonstration of audit findings through the video posts via Youtube channel as well as within the social media is starting to bring the first results people share the information with us, thus enabling a broader conversation in a versatile environment. However, SAIs not only need to identify the most appropriate channels and forms for an active communication with the public overall, but also with each individual on a more personal level. Highly motivated individuals are willing to share information and can be of a great help for the auditing institutions, if they believe the protection of their identity. Finding the right ways for attracting and involving the whistleblowers - people who are reporting on cases of misuse or inefficient use of public resources by the public institutions with no doubt is of a great importance. Speaking common and understandable language and trusting each other this is the shortest path to our clients each and every member of the society and tax payer, whom rights and interests we are entitled to stand for. In the light of takeover of the responsibilities as the leading country of the Contact Committee for the next year, ten years after the enlargement of the EU, I call the Supreme Audit Institutions of Europe to share the challenges which they face in order to jointly find the best possible solutions. Co-operation is the key word of our efforts. We are willing to share our best practice experience, thus contributing to a more effective, insistent and modern functioning of SAIs. I am looking forward to hosting the next Contact Committee meeting which will be held next year in Riga from 18 th till 19 th of June!

23 NAO (Malta) experience of ten years of EU largement By Brian Vella and Maria Attard (Performance Audit Section) - National Audit Office of Malta 21 non-discrimination, subsidies) have also been strengthened as a consequence of EU membership. Latter has also led to modernisation of laws in various sectors, to improvements in the collection and collation of statistics and to other changes in the administration of the country. Organisations of civil society and NGOs have also been strengthened. These challenges also had an effect on the state audit function in Malta. Impact of EU Enlargement on State Audit in Malta NAO Audit of EU component in national funds Brian Vella and Maria Attard Performance Audit Section, National Audit Office of Malta Introduction This year coincides with the 200 th anniversary since the setup of a state audit institution in Malta. It is also the tenth anniversary since Malta became an EU member state. Malta s accession to EU membership, with its resulting access to EU funds, the implementation of EU rules and regulations, the harmonisation of EU directives into Maltese legislation, and the setting of financial, environmental and social targets, has brought about significant progress in consolidating the country s institutions and infrastructure, as well as regulating the economy and in raising the overall standard of living. In particular, EU membership has reinforced the Maltese public sector auditor s role in promoting key values, such as value for money, quality of service, transparency, accountability and good governance. However, EU membership has also presented its own challenges. Maltese public administration and public financial management have become more complex. In addition, core areas like, for example, public procurement, the budget deficit and public debt are now not simply matters of concern to the national government; but are subject to strict European legislation and oversight. Regulatory frameworks (health & safety, environmental rules, consumer rights, fair competition, gender rights, The demand for improved accountability and greater transparency within EU Member States has resulted in a call for more information about government programmes and services and enhanced financial and performance reporting. Thus, the existence of two independent audit bodies to audit EU funds helps strengthen citizens trust in effective public management and reporting by EU Member States. The National Audit Office of Malta (NAO) is responsible for the external audit of central and local Government on behalf of Parliament. Although NAO is not the Audit Authority for EU Funds (this being the Internal Audit and Investigations Department within the Office of the Prime Minister with respect to Structural, Cohesion and Fisheries Funds, as well as being the certifying body of the European Agricultural Funds), NAO, as the state s independent auditor, also conducts stand alone EU-related audits (whether financial and compliance audits and performance audits), and takes into account the EU component in any audits it carries out, where applicable. During these audits, EU rules, regulations, directives and established targets serve as audit criteria. Preparing for EU membership In the line-up to EU membership, a number of meetings were held to determine the suitability of state audit legislation and NAO organisation structure to EU requirements. For instance, during a familiarisation visit at NAO in the year 2000, two senior officials from the European Court of Auditors discussed the role and functions of NAO, the compatibility of NAO with best European practices, the role of ECA in the audit of EU funds and the implications of the Acquis Communautaire on

24 NAO (Malta) experience of ten years of EU Enlargement continued 22 NAO with NAO senior management staff. In 2001, a European Court of Auditors delegation visited Malta to familiarise themselves with the activities of the various Maltese authorities concerned with external and internal financial control. The outcome of such meetings consisted in EU representatives being satisfied with the progress made by Malta in consolidating its external and internal audit structures and enhancing state audit legislation. The strengthening of NAO key audit functions Over the past decade, NAO continued to strengthen its key audit functions, namely in financial and compliance auditing, performance auditing and special audits and investigations. These were originally consolidated following a white paper that was published in 1993, entitled The Change Continues, which culminated (as regards public state auditing) in a change in NAO legislation in 1997, and ensuing major organisational change in the Office. Although changes carried out were not specifically related to EU Accession, these changes came at the right time as they ensured that the Office was well prepared for EU Accession in Shifts in NAO audit focus It is also to be noted that EU membership has had an effect on NAO audit focus since membership necessitated significant reappraisals of policy and public finance: the goal is now sustainability and the key words are fiscal prudence, national competitiveness, environmental stewardship, and welfare reform. All financial and compliance audits as well as special audits and investigations performed by NAO continue to aim to safeguard public assets and revenue, and assist Government entities in containing public expenditure, thus ensuring fiscal prudence, whilst performance audits address issues of an economic, efficiency and effectiveness nature with the aim of improving government initiatives, operations, controls, systems and structures and providing the Office s perspective on the sustainability issues referred to above. The drafting of NAO Audit Manuals To fulfil one of the commitments relating to EU membership and to facilitate and harmonise NAO policies, practices and procedures concerning the conduct of all audit work, NAO had drafted two Audit Manuals to regulate its audit methodology: the Financial and Compliance Audit Manual and the Performance Audit Manual. These manuals are the primary source of SAI policy and guidance relating to the effective management and performance of audits. They set out the standards and policies that govern the conduct of all audit work, specify the procedures to be carried out at the planning, implementation and reporting phases of audits, and provide guidance to auditors in complying with these standards and policies. Developments in NAO Reporting In line with developments in other EU Member State SAIs and the European Court of Auditors, NAO has also improved its reporting of audit findings to key audiences. Reports are presently more attractive in design and style, and are succinct in reporting audit findings and conclusions, and proposing recommendations. Such reporting is aimed to cater for the needs of a number of key audiences such as Parliament, auditees, anticorruption agencies, and the general public. In the last decade, NAO has further consolidated its role as guardian of the public purse. Despite the extent of its remit, partly necessitated by EU membership, NAO remains a remarkably lean and compact organisation with, on average, 40 audit examiners conducting audit work out of a staff complement of 55. ECA Training Activities Membership of the Union also facilitated the attendance by NAO employees of a number of ECA training activities, including seminars and workshops as well as secondment opportunities with ECA. The ECA/SIGMA Workshop on Audit of Public Sector Financial Statements was held in Malta in October A number of study visits to other European Union SAIs were also undertaken. Joint ECA/NAO Seminars were also held in Malta, the most recent one being in December 2013 on EU Developments Implications for Public Audit. Reference was made during this seminar to the impact of the financial and economic crisis on EU citizens, the measures undertaken by the EU to counter the effect of the crisis and stablise and strengthen the European financial system, and the role of national Parliaments and Supreme Audit Institutions in this regard.

25 23 EU Contact Committee EU membership has also provided an opportunity for senior members of NAO staff to participate in EU Contact Committee Meetings, including Liaison Officers Meetings and related Working Group Meetings. This participation enables the Office to keep abreast of European developments affecting public sector auditing and encourages networking, co-operation and the sharing of experiences in the auditing field. This Office has participated, in particular, in the Working Group on Structural Funds, in which it took part in a number of Parallel Audits with other EU Member States. It also took part in the Working Group on Activities on Value Added Tax, Network on National SAI Reports on EU Financial Management, the Working Group on Common Auditing Standards and the European Stability Mechanism Working Group. NAO also participated in the Task Force entrusted to explore the possibilities for cooperation with Eurostat and National Statistical Institutions. A senior NAO official was also involved in the drafting of the Guidelines on Audit Quality by the respective Expert Group on Audit Quality. The latter task was carried forward to the EU Contact Committee from the EU Candidate Countries relative Working Group prior to the 2004 EU Accession. EU-related audits carried out by NAO The following table provides examples of EUrelated audits carried out by the Office since EU membership. Table 1: EU-related stand alone audits Type of audit Performance Special Single/ Parallel Audit Single Single Audit Title Renewable Energy Sources and Energy Efficiency in Malta Malta's Renewable Energy Contingent Liability - Potential Costs Relating to the Non-Attainment of the EU's Mandatory 2020 Targets Performance Single Renewable Energy in Malta Follow-Up Financial and Compliance Performance Single Parallel Malta South Sewage Treatment Infrastructure Project Co-Funded under the EU Cohesion Fund Structural Funds: Environmental Programme Performance Parallel Safeguarding Malta s Groundwater Performance Parallel Simplification of the Regulations in Structural Funds Audit objectives To determine the extent to which Malta is minimising its dependence on fossil fuels by increasingly exploiting renewable energy sources and adopting energy efficient measures. This audit also sought to benchmark Malta s progress in this regard against EU targets. The report sought to determine Malta s contingent liability in the event that EU renewable energy mandatory targets are not attained. The purpose of the audit was to follow up the progress registered since the previous publication in relation to the original report s audit objectives. The audit sought to verify that, during the period under review, funds earmarked for this project were appropriately disbursed out of the relative Capital Vote of the then Ministry of Infrastructure, Transport and Communications. The objectives of this audit were to ascertain the extent to which Structural Funds allocated for the period under review were implemented and monitored to ascertain the sustainable success of the funded measure; and the extent of corrective action taken to ensure that concerns arising will not recur in the following period. The audit examined EU commitments relating to groundwater and the status of implementation of such commitments. The principal objective of this audit was to examine whether simplification measures relating to regulations in Structural Funds have been implemented in Malta.

26 NAO (Malta) experience of ten years of EU Enlargement continued 24 Due to increasing public concern regarding environmental issues and the achievement of sustainable development targets in line with current agreements with the EU, the Office has included within its work programme, a number of EU related audits on the theme of the environment. Some of these audits were carried out in parallel with other EU Member States. However, the predominant criteria for the final selection of EU-related topics, both stand alone and those performed in parallel with other EU Member States, depended on audit feasibility including possessing the necessary capacity and resources to carry out the proposed audit to the appropriate time, cost and quality standards; visibility; added value and potential impact. The results of audits listed in Table 1 related mainly to project management issues. These included: delays in planning processes and in certain instances in tender awards, inadequate monitoring of the implementation of the various projects and measures due to insufficient resources at the regulatory body, variations to the original estimates, minor deficiencies in payment processes, difficulty in reaching targets due to insufficient administrative capacity at different departmental levels and lack of adequate management information systems. The above audits have had a significant impact on audited entities as they spurred them to implement the necessary reforms in order to conform to best practice. The media also gave extensive coverage to most of the above audits sparking consistent public debate on the above issues. ECA Audit Missions in Malta Another effect of EU Membership on the NAO is the participation by the Office before, during and after audit missions of the European Court of Auditors (ECA). NAO examiners are mainly involved in an observer capacity basis during parts of ECA audits by accompanying the Audit Mission during these audits. NAO also ensures that all information requested by the ECA auditors, during any phase of the audit, is timely submitted by the audited body. NAO also undertakes limited additional system overviews prior to, during, and/or subsequent to some of these audits and may report upon them in its Annual Audit Report. Audits carried out by ECA in Malta in recent years included the following: Table 2: ECA Audit Missions in Malta Audited entity Audit title Audit objectives Paying agency of the Ministry for Resources and Rural Affairs Enemalta Corporation Internal Audit and Investigations Department (IAID) Audit of the documentary and on-the-spot check of three Single Payment Scheme beneficiaries Audit on the procurement of the Interconnector Malta-Sicily Project Audit of the IAID s role as the audit body with respect to two Operational Programmes titled Investing in Competitiveness for a Better Quality of Life and Empowering People for More Jobs and a Better Quality of Life The objective of this audit was to assess the effectiveness of systems established and operated by Malta and other EU Member States to recover undue payments made under the Common Agricultural Policy The objective of this audit mission was to review the accounting systems and supporting documentation of the contractors involved in delivering this project to ensure compliance with contractual terms The main objective of the Court s audit enquiry was to obtain reasonable assurance that the work carried out by the Department, as Malta s Audit Authority, was compliant with the requirements of Council Regulation (EC) No 1083/2006 Date of Mission February 2010 November 2011 December 2012

27 25 Audited entity Audit title Audit objectives Funds and Programmes Division within the Office of the Prime Minister Audit Mission on the External Border Funds The objective of this audit mission was to review the effectiveness of the procurement and contract management processes relating to the acquisition of equipment by a number of public entities, including the Immigration Police and the Armed Forces of Malta Date of Mission April 2013 Agriculture and Rural Payments Agency, Ministry for Sustainable Development, the Environment and Climate Change Audit of the European Agricultural Fund for Rural Development at the Paying Agency The aim of this audit mission was to examine the effectiveness of the supervisory and control systems, in particular the effectiveness of the administrative, on-the-spot and cross compliance checks, relating to rural development expenditure in Malta, partly financed from the European fund, in question September 2013 Ministry for Finance and National Statistics Office, Malta Statistics Authority, Central Bank of Malta ECA Audit Mission on the Excessive Deficit Procedure The objective of this audit was to assess the implementation of the Excessive Deficit Procedure, including the review of the institutional organistion related to the compilation of EDP data; cooperation with Eurostat in terms of guidance and support provided to the process of compilation and transmission of Government Financial Statistical data; and the relations with the Commission services as far as the implementation of the process of excessive deficit procedure is concerned June/July 2014 Evaluations by NAO relating to Excessive Deficit Procedure In 2013, the European Commission recommended that Malta be placed under an Excessive Deficit Procedure, calling for reforms in pensions and healthcare and sustainable public finances. The Commission recommended to the European Council that Malta should address the Excessive Deficit situation by 2014 by reaching a deficit target of 3.4% of GDP for 2013 and 2.7% of GDP in This adjustment path would result in bringing the deficit below 3% of GDP reference value by 2014 while at the same time ensuring that the debt ratio will approach the 60% of GDP reference value at a satisfactory pace. A recent NAO task requested by the Honourable Minister for Finance, was to carry out an evaluation and endorsement of the macro-economic forecasts for the Maltese economy for the years 2013 and 2014 underpinning Government s fiscal plans in relation to the Excessive Deficit Procedure. NAO was also required to provide an assessment of the main fiscal forecasts prepared by the Ministry of Finance and presented in the Update of the Stability Programme for Malta for the period 2014 to NAO concluded in these studies that the presented forecasts were attainable subject to strong commitment by the authorities, internally consistent and followed sound economic principles. To this effect, NAO has provided on opinion on the reliability of these macroeconomic and fiscal forecast projections. Participation by NAO representative in Government Finance Statistics Committee Meetings Moreover, the Deputy Auditor General participates in an observer capacity in the Government Finance Statistics Committee meetings that discuss issues relating to ensuring the reliability of Maltese Government Finance Statistics. Members of this

28 NAO (Malta) experience of ten years of EU Enlargement continued 26 Committee were present during Eurostat visits relating to Upstream Data, Excessive Deficit Procedure reporting and other matters relating to government finance statistics. Strengthening of public sector administrative capacity In addition, the process of EU enlargement has led to an improvement in public sector administrative capacity. Most audited entities now employ technical people who share a common goal with NAO, that of managing Ministries, Departments and entities in an economic, efficient and effective way whilst complying with the relevant rules and regulations, and fulfilling reporting obligations. Thus, NAO communication with auditees has been enhanced, the respective roles and responsibilities of both parties have been more clearly defined, and auditee management is more responsive to NAO s audit approach. Conclusion EU membership has brought about significant changes to Maltese public administration and state audit. Following EU membership, public administration has had to adapt to new structures and decision-making processes to fulfil EU obligations and manage and absorb EU funds. The successful introduction of the euro on 1 January 2008 has forced Malta to consolidate its public finances by reining in the fiscal deficit and government debt. EU membership has also led to a general improvement in governance particularly through the strengthening of the regulatory framework. Bibliography Report by the Auditor General on Public Accounts (annual), Work and Activities of the National Audit Office (annual), Performance Audit: Renewable Energy Sources and Energy Efficiency in Malta. NAO, September Malta s Renewable Energy Contingent Liability Potential Costs Relating to the Non-Attainment of the EU s Mandatory 2020 Targets. NAO, June Performance Audit: Renewable Energy in Malta Follow-up. NAO, February Performance Audit: Structural Funds: Environment Programme. NAO, October Performance Audit: Safeguarding of Malta s Groundwater. NAO, February Performance Audit: Simplification of the Regulations in Structural Funds. NAO, March An Assessment of the Macroeconomic Forecasts on the Maltese economy prepared by the Ministry for Finance: An Independent report presented by the National Audit Office. September An Assessment of the macroeconomic forecasts for the Maltese Economy performed by the Ministry of Finance in April 2014: An independent report presented by the National Audit Office. April 2014 An Assessment of the main fiscal forecasts prepared by the Ministry of Finance and presented in the Update of the Stability Programme for Malta, : An independent report presented by the National Audit Office. May All the above developments have resulted in the widening of the NAO audit mandate as explained in this article. Its audit approach and methodology have been strengthened over the past decade. EU membership has, furthermore, encouraged the Office to broaden its audit scope and collaborate further with other SAIs, thus strengthening interdependence without impinging on NAO Malta s and other individual EU Member State SAIs independence.

29 The EU 2004 enlargement and the Court of Audit of the Republic of Slovenia By Dr Tina Eržen, Advisor for Legal and International Affairs 27 Dr Tina Eržen, Advisor for Legal and International Affairs On 1 May 2004, the Republic of Slovenia became a Member State of the European Union and thus eligible for support from the various EU funds. As a member already of numerous other international communities and organisations, it was also entitled to money from their financial funds and programmes. Because of the different rules which applied to the management of these resources, as well as the large volume of cohesion policy funding from which, as was already clear at the time, Slovenia would continue to benefit at least until the end of the programme period, the Court of Audit had to develop new skills and approaches in order to audit the way these funds were used. A department was set up in 2005 to deal exclusively with audit of the use of resources from the EU and other international funds and organisations. The use of European cohesion policy funding is characterised by a system of shared management. In other words, the regularity and appropriateness of use are the responsibility of both the European Commission and the Member State where the funding is ultimately put to work. A large part of the risk associated with the use and management of EU resources remains in the hands of the individual Member States, as each devises its own administrative system to satisfy the common requirements of the fund management rules. It is for precisely this reason that it is so crucial to develop a system for carrying out all key management tasks. When shaping its approach to auditing the use of EU funding, the department proceeded in such a way that the risks identified to the regularity and appropriateness of use were classified by potential impact; the risks tackled first were those for which a suitable degree of management would prevent the occurrence of errors, the impact of which could have extended to the full recovery of funds to the EU budget. Audits were therefore chosen in order to address the key risks observed to the effective takeup of EU cohesion funding. They can be divided into three categories, as set out below. - Weaknesses and the need for improvements to the system of implementation The system for implementing EU funds domestically is based, firstly, on the recording of inflows from the EU budget and, secondly, on checks of the eligibility of costs, in which respect there is first a provision in the Slovenian budget so that it is able to reimburse them. In this connection, we found that, although making a provision for payments from the national budget results in deficits that are higher by a few percentage points (4.5% - 6.5% during ), a greater budget deficit factor is the slow and ineffective disbursement of funds. In a later review of funding dynamics between 2004 and 30 June 2009, we found that, while the Republic of Slovenia as a whole was a net recipient of funding during this period, there were very significant differences from one year to the next and between different areas. The smallest gap between planned and actual revenue occurred in the area of in the areat of the common agricultural policy, and the largest in cohesion policy, where planning has not improved at all. Regarding the handling of irregularities and financial corrections, it was also in the CAP area that appropriate action was observed for the period, with the necessary improvements in monitoring and reporting. We found significant weaknesses in the planning, monitoring and evaluation of transfers from the EU budget to the State budget. For 2005, we considered that the Government of the Republic of Slovenia did not have an effective system for planning, monitoring and evaluating transfers, as it emphasises execution of the EU budget through centralised management where the recipients of funding are not the State budget but various entities in the Republic. Despite changes in certain areas, the situation did not substantially improve in subsequent years. As late

30 The EU 2004 enlargement and the Court of Audit of the Republic of Slovenia continued 28 as 2008, data on the use of dedicated EU funds were neither collectively processed nor made public, although this would have made it possible to obtain a view of the volume of actual revenue compared with planned revenue. We also concluded that, in their current form, the final State budget accounts cannot provide information on all payments received, although this should be a required part of sound policy management. - Conduct of the responsible institutions, focusing on the managing authority The managing authority is a key player in the implementation of EU funds. In the years since 2004, it has already changed its name and organisational structure on many occasions, and has been established at different levels and with a range of powers, notably in relation to other State authorities. Under the European rules, as far as possible it must be a professional and independent body with direct access to all the necessary information and all institutions. Its main task is to ensure the sound management of EU resources, and in this context it is Slovenia s sole interlocutor with the European Commission. One of its duties is to guarantee the effectiveness of administrative checks, but we were unable to verify this with regard to the procedures laid down for Part of the problem lay with the inspector training programme, which we found in 2008 to have numerous shortcomings, in particular because it was insufficiently targeted and hampered by a high staff turnover rate. We obtained our most comprehensive overview and analysis of the situation, the challenges and the difficulties facing the managing authority from an audit of the implementation system towards the end of the programme period, when we assessed the performance of the entire system and concluded that it should be made more effective. The findings are worrying, mainly because of weaknesses in the dedicated IT system, which should permit monitoring of the implementation of operational programmes for the purposes of financial management, monitoring, control and evaluation, as well as poor cooperation and harmonisation among the responsible institutions, defective organisation and the inadequate incorporation of EU legislative requirements into national law. The common aim of these audits was to detect weaknesses while there was still time, and to recommend improvements accordingly. The third group of risks identified was: - Reduction of errors in project implementation Here we examined in particular whether objectives had been achieved and the co-financed projects/ activities implemented effectively. Our work focused mainly on establishing good practices in the field of project management. In one case, we also issued a decision on a breach of sound management obligations. Because most of the European Development Funds are under shared management, they are exposed to similar risks in all Member States. Where mandated by the Contact Committee, Member States supreme audit institutions also occasionally address those risks through joint projects and parallel audits. This is the case in particular for risks arising from the shared concept of management processes, from controls or from specific Commission requirements. Parallel audits by the SAIs of multiple Member States have greatly contributed to the transfer of knowledge. The Slovenian Court of Audit has participated in three parallel joint audits on the use of EU resources in the framework of the working group on the Structural Funds, as well as one joint audit of the TEN-T project. As well as the projects referred to above, the Court of Audit has carried out several other audits of European elements, as well as some of minor subjects specific to the EU. In our view, the hard work we have put into meeting the challenges of EU membership, both for the Republic of Slovenia and for the Slovenian Court of Audit, is best illustrated by a poster which we prepared especially for our presentation to the Contact Committee meeting held in Luxembourg in October of this year. The poster takes pride of place in our contribution to that occasion.

31 29

32 ECA and Polish SAI signed an agreement on cooperation 30 By Katarzyna Radecka, private office attaché At the end of October, on the initiative of Augustyn Kubik, Polish Member and his private office and with strong support from Krzysztof Kwiatkowski, the President of Najwyższa Izba Kontroli (NIK), the ECA and Polish SAI signed an agreement on cooperation. The project foresees Polish auditors to participate actively in the audit mission to Poland during the audit on Animal disease eradication, control and monitoring. Polish colleagues will subsequently contribute to the drafting of the Court s SPF. The final results of the audit may serve NIK as a basis for its own, future audit of this issue. respect to the audit of EU funds and the support of SAI accountability. Kevin Cardiff, the Reporting Member of this audit and also the signatory to the agreement, hopes that the project, if successful, may be used as future cooperation modes between ECA and SAIs. Augustyn Kubik and Kevin Cardiff, Members of the Court, after the signature of the agreement. Krzysztof Kwiatkowski, President of Najwyższa Izba Kontroli (NIK); Augustyn Kubik and Kevin Cardiff, Members of the Court The agreement fits well into the ECA s strategy for , notably the ECA s strategy for international cooperation for 2014 and beyond, in which the Court commits itself to share knowledge and expertise and develop capacity of SAIs with E FOCUS A Jacek Uczkiewicz, Vice-president of NIK, signing the agreement on behalf of the NIK. Focus In December 2014 the Court says: Hello to: Goodbye to: ALBU Carmen CHERNEVA Polina CRITOPH Hannah KONSTANTINIDIS Aris PAVLAKOVIC-MILOSAVLJEVIC Andreja SHARROCK David LY-SUNARAM Vincent OBADA Roxana

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